Following up on my stock-based compensation (SBC) post from yesterday, I did some digging into a few companies based on what Kevin Koharki shared in his interview last week. As of today, I don’t think SBC is a bad thing; it just isn’t well understood. I view it as a tool, and the impact it has on a company’s shareholders (negative or positive) is determined by how management uses the tool.

We’re moving into an era when technology companies are shifting from asset light and cash rich to capex heavy and possibly strapped for cash. The cash-generation abilities of public tech companies will be scrutinized more closely going forward. After looking at the impact that SBC and related buybacks can have on the “true” free cash flow of a company, I suspect that evaluating SBC’s impact will become an important part of how companies are valued.

I’m working on my own framework, which I’ll use going forward. It will leverage what Koharki shared and also incorporate other variables that determine the per-share economic impact of SBC on shareholders. Hopefully I’ll have something I can get feedback on within the next few days.

Last week, I listened to an interview with Kevin Koharki. The topic was something I’ve been thinking about for over a year: how does stock-based compensation (SBC) impact shareholders of public companies? When I review the financial statements of public technology companies, I see that they have large amounts of SBC expense, but it’s a noncash expense. So, many people back it out and focus on cash flow from operations, free cash flow, or adjusted EBITDA. But that SBC must be paid to employees in cash at some point (assuming the stock performs well), so how is it accounted for?

I’ve leaned toward using diluted share count instead of shares outstanding when calculating free cash flow or potential free cash flow per share. But Kevin thoroughly explained how SBC materially reduces operating and free cash flow of companies that offset SBC dilution by repurchasing shares (i.e., doing buybacks). He does a great job of walking through a real-life example of a company and showing where on the financial statements you can find the information you need to determine how SBC affects cash flow per share. The biggest thing I learned from Kevin was that in some companies, shareholders get hit twice: when companies issue SBC and when they do buybacks. And that second hit isn’t accounted for on the income statement or cash flow from operations. I hadn’t considered this, but when he walked through it, it made a lot of sense.

Kevin is spot on, but I will say that two assumptions underpin the worst-case scenario in his argument. He assumes the stock price will be higher when employees cash in their SBC and the company repurchases shares. That’s been true the last few years, but historically it isn’t always true. The stock market has long periods of underperformance (e.g., 1964–1981). Companies can’t control the prices at which employees sell shares, but they have total control over the price they pay to buy back shares. The smartest CEOs repurchase shares only when the stock is suppressed because the stock is likely trading for less than it’s worth, meaning the returns on buybacks are often higher than capital allocation alternatives. Henry Singleton mastered this, and it’s a big part of why Warren Buffett praised him and why Teledyne’s shares outperformed (learn more here). If a company repurchases shares at materially lower prices than when SBC was issued and doesn’t issue additional SBC to employees to compensate for the lower stock price, it’s likely a benefit to the company. Those are two big ifs, though, especially the second one.

The second assumption is that companies that issue SBC are buying back shares to offset the dilution created by SBC. That’s true of many companies, but not all. Some companies don't repurchase shares. Instead, they focus on minimizing share dilution by limiting share count growth to a low single-digit percentage each year and improving the underlying fundamentals of the business. One company I track increases share count by 2% to 3% a year via SBC, but it’s growing top-line revenue, operating cash flow, and free cash flow at 30% or more annually. The company hasn’t repurchased any shares to date. Thus, the business fundamentals are increasing at a rate that far outpaces the share dilution from SBC. Said differently, the intrinsic value of the company is growing at over 30% annually, while shareholders are being diluted roughly 3% annually. It’s true that 3% dilution means investors own 3% less of the pie each year, but that’s not as much of an issue when the pie is 30% larger each year.

I think Kevin is on to something and that more people will start to pay closer attention to this in 2026. Anyone interested in how SBC works or how it impacts shareholders should consider watching Kevin’s interview here.

Earlier this week, a jury found Meta and Google negligent in operating their products in a way that harms kids and teenagers. Both companies will most certainly appeal, but the verdicts have already reverberated through the press. I don’t use any of Meta’s products (Instagram, Facebook, etc.), but I do listen to Google’s YouTube regularly, so this case caught my attention.

I’ve always thought these platforms are protected because they’re not creating the content and aren’t the publishers. They merely provide a place for publishers to post content and for users to consume it. Given this verdict, I need to learn more about this case, what the jury found these companies liable for, and why the judge allowed it to proceed.

I’m not sure what the ramifications of this case will be, but I suspect it will have an impact on sites hosting third-party content. I’m curious to see how this plays out.

This week, I had a thesis on a publicly traded company that I wanted to think through and research. I fired up Claude (not Cowork) and started laying out my thinking. I included references to public filings with the SEC and past events in the industry in which this company operates. Claude was a great thinking partner; it helped me crystallize my thoughts. It was especially helpful in going out to the SEC website and digging through tons of filings to verify details that I knew were roughly accurate but that I wanted to be precise about.

After I was done sparring with Claude about the thesis on this company, I instructed it to act as if it were a seasoned analyst and create a report that summarized what we concluded with supporting facts and figures. The output was a 10-page report that was very impressive. I did have to read it and make Claude clarify and adjust several things, but it made the adjustments with no problem. I sent a copy of the report to a friend, and he was blown away.

Creating that kind of report would normally take several days. Between thinking, researching, and drafting the report, it’s a ton of work. I’d probably need someone to help me with it. But I was able to go from a hypothesis to a report with probability-weighted scenarios supported by facts in less than a day. This is helpful because I can quickly create something that helps me improve my thinking. Documenting my thinking and sharing it with others for feedback, and storing it for later reflection after the situation has played out, is easier than it’s ever been.

I don’t want AI to think for me, but it’s a great tool for accelerating my thinking and analyzing so I can reach the right conclusion faster. And it does a great job of organizing and presenting my thinking in a document incredibly quickly.

Today I was looking at my decision journal and the post I wrote about it (see here). Just looking at the journal made me see a recent decision more rationally. It was a small decision, not worthy of being recorded in my journal. But thinking about how I would describe it if I did write about it in the journal helped me think about it more clearly and quickly conclude it wasn’t the greatest decision.

I think that knowing I have a decision journal forces my brain to think more rationally. I guess physically seeing the journal may activate certain frameworks around decision-making. Not totally sure of this yet, but something I’m definitely watching.

I’ve been thinking about a analyzing a public company to see if it’s worth investing in. The company operates in a new market. I’m interested in the market, but I know zero about it or its players. From some preliminary general research, I realized I didn’t know what I didn’t know and didn’t know where to look. My research felt too broad, and I needed a better way to understand the lay of the land in this new market.

Several months ago, I meet an early-stage founder who’s building her company in the market adjacent to this public company. She’s sharp and knows her market like the back of her hand because she worked in it for over a decade at her previous employer. I enjoy chatting with her and always help however I can when she asks for something.

This week we met. I explained to her my desire to understand this new market and the products the publicly traded company offers. In 20 minutes, she gave me a masterclass. She described the competitors, the long-term risks for the public company’s current products, and the nuances of the products offered in this market by each competitor. She even referred me to a white paper that she thinks I’ll find useful.

That 20-minute conversation probably saved me ten-plus hours of research. I feel more excited about the market because the founder confirmed my hunch: it’s small but exploding. I also feel like I know what areas of the market I need to understand deeply before making any investments.

My takeaway from this was that sharp, early-stage founders know their markets cold and can be great resources if you’re trying to quickly get up to speed on a market.

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I was thinking more about how Thrive Capital’s investment in Carvana positioned them to distribute 0.2 times the cash their investors put into the 2022 fund (see here). That distribution happened in 2025, which was after only two to three years, depending on when the fund closed. For a fund that invests in private companies to return $0.20 for every $1 invested in the fund in just two to three years is amazing. Like I said yesterday, it usually takes five to seven years before any cash is returned.

When you consider the current landscape, in which venture capital (VC) and private equity (PE) funds haven’t been able to return much cash to their investors, that cash distribution looks even more impressive. Many investors in PE and VC funds want to use cash returns from previous investments in PE and VC funds to fund new ones. But that’s hard when your old fund investments aren’t returning cash.

The Carvana investment was definitely an exception. Recovering from a 96% loss to a handsome profit isn’t the norm. But what really stood out to me was that Thrive was investing in private and public technology companies simultaneously. Investing in private start-ups and growth-stage companies requires a unique skill set. You’re trying to make a transaction happen between two sophisticated buyers. Public-market investing is a different animal. You have no idea who you’re buying from; they may or may not be more sophisticated than you. It’s an auction-driven market where price is determined by supply and demand flows.

From my experience, it’s common for investors to be comfortable in either private- or public-market investing, but not both. It’s uncommon for VC investors to simultaneously invest in public companies. Nor is it common for firms that focus on investing in the stock market to invest in early-stage or growth start-ups simultaneously. The skill sets are just so different. Also, for companies that invest mainly in public markets, it’s hard to invest in private companies when your investors have daily redemption rights. You might not be able to sell an illiquid position quickly enough to meet those redemption requests.

With that said, I think that being skilled in both areas is a huge advantage for an investor. Especially a technology investor. For example, understanding early-stage private companies can give them an edge in recognizing an amazing company before other public-market investors understand the company’s potential (think Amazon in the early 2000s through early 2010s). And vice versa, understanding how various public-market companies’ business models work and how public investors value them can help with pricing private deals and adding strategic value to the founder or management team.

I’m a fan of both; I think investors who can be proficient in both have a leg up on their competition. Personally, right now, I’m enjoying learning about and investing in public markets.

I read an article today about Thrive Capital (see here), which is a venture capital firm. They recently finished raising $10 billion for their 10th fund (see here). The first article details how some of Thrive’s earlier funds haven’t provided investors with great cash distributions. For example, their 2011 vintage fund has returned only $1.30 for every $1 invested. The fund still holds investments that haven’t been sold, so that will likely go up at some point as they sell more investments. The article discusses other later funds that have returned more cash to investors than the 2011 fund.

An interesting data point in the article was that Thrive’s 2022 fund has already returned 20% of the cash investors initially put into the fund. Usually, it takes 5 to 7 years before investors in venture capital funds see any cash back, so that’s a good amount of cash returned in a short time. That's good enough to put that fund in the top 5% of funds launched that same year. So how did they pull that off so fast?

In March 2022, the stock market was tanking, and Thrive bought a large amount of Carvana stock. This public stock investment eventually led to a $522 million profit, more than quadrupling Thrive’s investment. That’s why the 2022 vintage fund was eventually able to distribute $454 million in capital to investors by early 2025. But the key word is “eventually.”

I did some digging and found another article about this investment (see here). Apparently, the investors in the fund weren’t always happy about the Carvana investment. I wondered why, so I did more digging.

Assuming that Thrive bought Carvana stock at its cheapest point in March 2022, they paid about $98 per share. (It’s not likely that they timed the bottom that precisely, but let’s assume they did.)

Carvana stock went on to crash the rest of the year. The company laid off a large number of people in November (see here) as credit losses mounted, and the stock reached a low of $3.55 on December 7, 2022, when the company flirted with bankruptcy. So, from the time Thrive invested in March, the stock lost over 96% of its value in a span of just eight or nine months. Let’s assume that Thrive invested around $170 million, which they saw dwindle to about $6 or $7 million on paper. That's an unrealized paper loss of over $160 million by December 2022. They had to report performance periodically to investors, including those paper losses, and I can’t imagine that went over well. It certainly explains why some investors weren’t supportive of the Carvana investment.

The good news for investors is that Thrive didn’t sell. They rode the investment back up. This article was written in May 2025, so their shares were sold before that. Assuming they sold at the peak in early 2025, they sold for around $290 a share. (Again, not likely they timed the top, but let’s assume they did.) That means they rode the investment from $98 to $3.55 to $290. That’s a wild ride and probably not one the Thrive team or their investors enjoyed. But in the end, they were able to distribute $454 million back, and as of the writing of that article, they still held $65 million in shares (which have increased in value substantially since then).

What a fascinating story. It was a great reminder that investing isn’t always a straight line up. The key is to have faith in the company, its management, and the market they’re operating in.....along with a little bit of luck (Thrive’s investment would have gone to zero if Carvana had filed for bankruptcy). If you’ve backed the right horse and jockey and they’re running in the right race on the right track (i.e., market), maintaining your conviction can pay off, but that doesn’t mean it won’t be without pain before the payout. And conviction definitely doesn’t guarantee you won’t lose money, as Thrive came close to doing.

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This week, I looked deeper into publicly traded software and technology companies. Over the last two or three months, some of these names are down over 30%. I wanted to know if they’ve become cheap and could appeal to value-minded investors.

Now, a lower stock price doesn’t mean a company is being offered at a cheap price (see cheap vs. low here). The only way I can determine if something is cheap is by determining its value first and then comparing its value to the price at which it’s being offered. If its price is below its value, it’s likely cheap.

I picked a few names and did some quick, back-of-the-envelope math to value them. I looked only at software and technology companies that were increasing in three areas: revenues (or equivalent), cash provided by operating activities, and free cash flow. Said differently, they had to be increasing top line, generating more cash, and putting more cash in their bank account.

I determined how much net cash each company has on its balance sheet. Think cash, treasuries, etc., minus short- and long-term debt. For example, a company has $ 4 billion in cash equivalents but $1 billion in total debt. Its net cash position is $3 billion.

I then subtracted that net cash amount from the market capitalization (i.e., valuation) to determine the enterprise value of the company. For example, a company with a $10 billion market cap but $3 billion in net cash has an enterprise value of roughly $7 billion.

Next, I looked at the statement of cash flows to determine the trailing 12 months of cash provided by operating activities. Some people like free cash flow, but I like cash provided by operating activities because it’s a good estimate of how much cash the company generated from its core business and could hypothetically distribute to shareholders. Again, this isn’t the perfect figure to look at, but for quick, back-of-the-envelope math, it does the trick for me.

I then divide the enterprise value by the trailing 12 months of cash provided by operating activities to determine the operating cash flow yield. For example, a company with a $7 billion enterprise value that generated $700 million in cash from operating activities in the last year is generating a 10% annual operating cash yield on an investment made at a $7 billon enterprise value. In theory, over 10 years (assuming no growth, no taxes, etc.), the company would generate an additional $7 billion in cash. It could distribute that $7 billion to shareholders, which means anyone who bought at a $7 billion enterprise value would have made their money back over those 10 years. Alternatively, if no distributions were made to shareholders, there’d be an extra $7 billion in the company’s bank account, so net cash would increase by $7 billion (assuming they didn’t reinvest any of the cash). This is a simple example that ignores lots of potential nuance, but you get the gist.

The result of my analysis was eye-opening. Some of the software and technology names I examined (mid- and small-cap companies) were trading at very attractive yields considering that the current 10-year treasury is ~4% and historically it’s ~6% (see here). One mid-cap software name was trading at an almost 9% yield. It’s an application software company, so the threat of AI is a real unknown for them and the durability of their cash flows isn’t crystal clear right now. But that’s still an attractive yield for a company that’s currently growing at over 20% and whose growth rate likely won’t go down in the short-term to medium-term.

My gut feeling is that the baby might have been thrown out with the bathwater. Some software and technology names are currently offering attractive operating cash yields. There’s more risk than with something like a 10-year treasury, for sure, but I’d imagine that savvy, value-oriented investors are analyzing these companies and closely watching the ones with strong moats that AI can’t easily erode and whose cash flows seem durable and likely to continue increasing.

I can’t predict the future, but my rough math indicates that today, some (not all) public software and technology company valuations reflect reduced potential downside (risk) and increased potential upside (reward).

I’m curious to see how things in the stock market play out going forward.

We’ve heard from lots of headlines and chatter that public software companies have seen their valuations dive. The stock market has seen more sellers than buyers for shares of these companies. Many narratives exist (a common one is that AI will disrupt these companies), but I’m not sure what the root cause of this multi-month sell-off is.

One thing I’m curious about is whether, and if so how, this tech sell-off will impact 2026 IPOs of tech companies. So far this year, we’ve seen 58 total IPOs (not just tech). This is about 31% above 2025, which had 44 by this time. So far, that’s strong.

With talk about SpaceX and other technology companies aiming for 2026 IPOs, I’m curious about whether the current turmoil will subside or persist, which likely will determine whether these IPOs will happen as planned or be shelved.

This is something I’ll be watching closely.